Using the Tax Foundation's Microsimulation Model to analyze the deficits projected by the President's Budget, we can project how much revenue a broad-based increase in federal income tax rates would generate. As usual, the President's Budget forecasts lower deficits than any other reputable source, but we have used those optimistic deficit estimates to show that even the rosiest deficit scenario is far from rosy.

Assuming deductions, exemptions and credits were kept the same as they are now, Congress would have to raise each personal income tax rate by a factor of almost two and a half to erase the 2010 deficit. Even in later years when the President's Budget predicts that the deficit will be "only" in the $700-to-$800 billion range, the rates necessary to close the deficit are untenable.

Table 1 shows the effect on statutory rates of such a hypothetical tax hike in 2010. Instead of taxing couples with rates that range from 10 percent to 35 percent, tax rates would have to start at 24.3 percent and range up to 84.9 percent.Table 2 applies the same method as Table 1 but for the years 2011 through 2020. Two rate increases for this 10-year period are already counted in the deficit projections given by the President's Budget. The top two tax rates will increase on January 1, 2011. The 33% rate will rise to 36%, and the 35% rate will rise to 39.6%. Yet the additional tax rate hikes necessary beyond those, and for all the lower brackets, are still remarkably steep if the budget deficit is to be eliminated, especially at the end of the decade when, even with optimistic deficit projections, deficits are expected to rise quickly and hit $1 trillion.

Table 2 applies the same method as Table 1 but for the years 2011 through 2020. Two rate increases for this 10-year period are already counted in the deficit projections given by the President's Budget. The top two tax rates will increase on January 1, 2011. The 33% rate will rise to 36%, and the 35% rate will rise to 39.6%. Yet the additional tax rate hikes necessary beyond those, and for all the lower brackets, are still remarkably steep if the budget deficit is to be eliminated, especially at the end of the decade when, even with optimistic deficit projections, deficits are expected to rise quickly and hit $1 trillion.

TrackBack URL for this entry:$MTTrans>

Comments

Wow. And all this due to the fact that Congress spends like drunken sailors. Plenty of folks would try to control and minimize drunken sailors. Who shall do the same for Congress?

Posted by: Jake | Mar 12, 2010 4:13:53 PM

Since the top income bracket are the ones who got all the deficit spending it seems reasonable.

However, I can see how it would be quite a hit to the life-style. It would leave the top earners with not much more than 300 times the median after tax income.

Posted by: Stephen Burgoyne Coulson | Mar 12, 2010 5:39:57 PM

Tax rates like this will be unimportant. Obama and the Democrats are determined to destroy the United States as a free nation. What will be left will be a totalitarian socialist rump state.

Posted by: John Steele | Mar 12, 2010 8:36:00 PM

Years ago, when I told some of my medical clients that their total federal and state incremental tax rates would hit 56%, they said that they would quit working when it got to that. It wasn't worth it to them to work for less than half wages. How's that going to help health care?

61-85% tax rate on your hard-earned income if you make over $68k? I think a better choice would be to cut your work week from 75 hours to 35 (or less), spend more time with the family, play more golf, and let somebody else shoulder the tax burden.

Oh wait, the top 1/3 of U.S. earners already do that, so guess that's not really an option.

Posted by: Charles Bragg | Mar 13, 2010 1:55:40 PM

Still lower than the historic highs of the 50s. The fact is we've been undertaxed (for the level of services demanded) for years. Quite frankly we need to raise taxes and cut spending now if we want to restore fiscal sanity to this country.